In a run up to Finance Act, 2015, the finance bill, 2015 has been amended on various counts and one of them is an amendment in definition of Income by inserting clause (xviii) in section 2(24), which read as under:-

“assistance in the form of subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than subsidy or grant or reimbursement which is taken into account for determination of actual cost of the asset in accordance with the provision of Explanation 10 to clause (1) of section 43”

The genesis of propose amendment can be trace back to judicial precedents in which capital subsidy (the benefit of subsidy being capital in nature) was held to be non-taxable. Through above-mentioned amendment, all sorts of subsidy, capital or revenue in nature, is supposed to make taxable.

This view on reason for purported amendment is general and any support from statutory authority on raison d’etre for such amendment is awaited.

In this write-up, attempt is made to evaluate the said amendment to understand the intricacies involved in the operation of stated provision.

1. Essentials to attract Provisions of Section 2(24)(xviii)

The various benefits envisaged in section i.e

a) Subsidy

b) Grant

c) Cash Incentive

d) Duty Drawback

e) Waiver

f) Concession

g) Reimbursement

are qualified by the word “assistance”.

Thus it seems that stated benefits are taxable in the hands of assessee only, when such benefits carry the character of “assistance”

The word “assistance” has not been defined separately, as the said expression is understood in the common parlance as to help other voluntarily without any obligation on the part of assistance provider.

Now to evaluate whether stated benefits are taxable, it is pre-requisite to assess, whether stated benefits are provided voluntarily or are in the course of performance of duties mandated under statutory law.

Under Indian democratic set-up, parliament or state legislature are law making bodies and actual execution and implementation thereof is left in the hands of Central Government or state government respectively.

To propound on afore-said concept, let us consider some illustrations:-

Parliament has enacted a National Food Security Act, 2013 to provide subsidized foods to Indian Citizen.
Now providing food at concessional rate by the Government is mandated by law and it will not be deemed as assistance in strict sense, as Government is carrying out its duty of providing subsidized food, by implementing the law enforced by Parliament.

Parliament has legislated Income Tax Act, 1961 wherein tax concession is given to assessee engaged in prescribed line of business (Section 10A, 10B etc.)
Thus tax concession cannot be deemed as Income of assessee under proposed section 2(24)(xviii), as the same is not an assistance but an execution of duty enforced by law.

Ministry of Textile has formulated a scheme of Interest Subsidy for loan taken under Technology up gradation fund scheme.
This Interest subsidy is being proposed by Ministry of Textiles voluntarily to promote the productivity of Textile Industrial Unit in India. This subsidy was not enforced under legal law (I suppose), and as result Interest subsidiary will be an assistance to an assessee and hence taxable.

Thus in my view, unless the state benefits u/s 2(24)(xviii) imbibe the character of assistance, the same cannot be made taxable. If certain benefit is granted under some obligation, then receiver is also accepting the same as his right and in this process, the element of assistance is completely lacking. To this end, there is need to evaluate whether the Direct Benefit Transfer benefit under LPG subsidy scheme, is assistance or not and hence taxable in the hands of assessee or not. Similarly whether provision in its existing form will also be applicable to Petrol Subsidy is not free from doubt.

2. Timing of Taxability of Assistance

In certain schemes, the benefit is given to person in present but the same is subject to certain conditions to be met in future.

Consider the case of Import of Capital items without import duty under Export Promotion Capital Goods Scheme (EPCG)

a) Under EPCG, person is allowed to import Capital goods at NIL/concessional import duty, but said person is required to carry out export of prescribed value in specified time period in future.

b) Upon failure to execute required export, person is required to pay import duty exempted earlier along with Interest.

The question for consideration is at what time concession in Import duty will be taxable:-

a) At the time of import of Capital Item?

b) At the time, when required amount of export is executed in future?

To this end, there are further complications, explained as under:-

a) Suppose Import duty concession is being made taxable in present at the time of import.

b) Since income proposed u/s 2(24)(xviii) is not allocated to specific head of Income, the said benefit will be taxable under Residual Head – “Income from other sources”.

c) Suppose in future person fail to execute the require amount of export and is required to pay import duty saved earlier along with penal interest.

d) Now in view of provisions of Income computation & Disclosure standards V relating to fixed assets, the said import duty on capital good is required to be added to the cost of capital asset and depreciation will be allowed under PGBP.

e) Thus in above-stated illustration, one will appreciate that there is mismatch in treatment of same item at two different point of time.

Thus transparencies on above-mentioned intriguing aspects are also required.

Any Authority or body or agency- Terms not defined

a) One course of interpretation could be based on principle of ejusdem generis i.e Authority or body or agency should be one established by Central or State Government.

b) In explanation 10 to section 43(1) providing for reduction of actual cost of assets by the amount of subsidy or grant or reimbursement given by Central Government or State Government or any authority established under any law or by any person, the legislation has clearly postulate the status of benefit provider and among which non-governmental body (any other person) is also provided. Thus based on this analogy, a conclusion can be inferred that in section 2(24)(xviii) intention of legislature is to cover both Governmental and non-Governmental authority or body of agency. If that be the case, then stated benefits provided by any person (whether governmental or non-governmental) to an assessee, the same would be taxable in the hands of assessee under proposed amendment.

c) Thus in view of afore-said clarity is urgently required on interpretation of above-stated terms.

In my personal view, the ostensible amendment is unwarranted. In every decision-making, potential benefits is casted against probable cost, to arrive at the conclusion. I think, in the stated proposal, the revenue potential will certainly fall short of expected cost in probable litigation. In current scenario, the need for certainty in tax legislation is imminent and enactment of litigative provision should be put to back burner. I also understand Government is putting all measure to cut down fiscal deficit to foster economic growth, but in that process it, if want to increase the tax revenue, should come up with bold and unambiguous provisions, which is always welcome by business and investor fraternity.